This is the fourth in a series of posts that explain economic reasons for opposing single-payer healthcare.

Chris Conover, Duke economist, has given us three reasons thus far including:

• Hidden costs of $1.1 Trillion in deadweight losses in 2017 alone – (Part I)
• More than half a Trillion dollars of added waste to our system – (Part II)
• Rationing of care costs ranging from $152 to $194 Billion in 2017 alone – (Part III)

 

Medical Innovation Adverse Effects

The fourth reason to oppose single-payer healthcare systems is the adverse effects it will have on medical innovation. Conover says the U.S. is by far the world’s leader in medical innovation. George Mason University economist Tyler Cowen put it this way over a decade ago: “The American health care system, high expenditures and all, is driving innovation for the entire world.”

The U.S. leadership in biomedical innovation is indisputable. According to Thomas Boehm, Medical Director at Jerini AG, the availability of funding “is the single most important factor explaining the dominant role of the U.S. in innovative research.”

• From 1988 – 2003, the U.S. invested more than 5 times as much as the EU in private biotechnology companies. (see graphic below)
• As of 2012, U.S. biomedical R&D spending amounted to 0.76% of GDP, compared to only 0.46% in Europe and 0.35% in Canada. Single-payer Canada devotes less than half as much of its economy to biomedical R&D as the U.S. does. (see graphic below)
• Although the U.S. economy accounts for only 16.2% of world GDP (2012), the U.S. accounted for 44.4% of biomedical R&D in the world.
• Private industry R&D accounts for 59% of total U.S. spending.

 

Pharmaceutical R&D Spending

The U.S. dominance in pharmaceutical spending is even greater than in biomedical research. The major reason for this is the U.S. is the lone major industrialized country not to impose pharmaceutical price controls. Profits in the U.S. pharmaceutical industry are approximately four times higher than in other countries. These increased profits are directly linked to pharmaceutical R&D spending.

How much would pharmaceutical innovation be reduced under a single-payer healthcare system such as “Medicare For All?”

Economist John Vernon has done simulations that show that if pharmaceutical prices in the U.S. were regulated (controlled) as other countries do, this would lead to a decline in industry R&D between 23.4 and 32.7percent.

The current social benefit economists calculate for the consumers of pharmaceuticals is about $1.4 Trillion per year. New drugs are estimated to amount to $100 Billion of this benefit in 2017. If there were a decline in industry R&D between 23% and 33%, the expected loss of social benefit would be about $23 Billion to $33 Billion under a Canadian-style system with price controls.

Increased Life Expectancy

There is another adverse effect of single-payer healthcare on pharmaceutical innovation. Columbia University professor Frank Lichtenberg has calculated the impact on life expectancy as a result of “New Molecular Entities” (NMEs) – new drugs approved. He estimates every NME increases life expectancy an average of 0.17 years every year.

Thus far in 2017, the FDA has approved 34 NMEs; in 2016 it approved 22 NMEs. Using the 2016 data, if single-payer price controls resulted in this number being reduced by 23 to 33%, it would imply the annual loss of 5 to 7 NMEs a year – which would reduce life expectancy by 1.5 to 2.0 months. Since there are nearly 4 million births a year in the U.S. that implies a loss of 482,000 to 692,000 years of life that might other wise been gained had innovation remained at current levels. If each life year is assumed to be worth $100,000, that represents a loss of $48 to $69 Billion.

How much would other medical innovation be reduced under Medicare For All?

Pharmaceutical R&D constitutes less than half (45.5%) of all U.S. medical research spending. If the cost-effectiveness of the other 54.5% were identical to pharmaceuticals, the aggregate social cost of lost innovation would range from a low of $50 Billion to a high of $152 Billion. 

This other medical innovation actually exceeds pharmaceuticals in importance. Of the six most important innovations of the last 25 years, only two – ACE inhibitors for control of high blood pressure and statins to lower cholesterol levels – have been drugs. The others include MRI scans, CT scans, Balloon angioplasty and coronary artery bypass grafts. Imagine if these life-changing innovations had never happened as a result of adopting a single-payer healthcare system.

 

In Part I and Part II of this series, I discussed two of five reasons to oppose Senator Sanders’ Medicare For All Act, which calls for single-payer healthcare, from economist Chris Conover’s point-of-view. Today we will look at the third of his reasons.

Healthcare Rationing

Rationing of healthcare treatment occurs in all known single-payer healthcare systems including Canada, Great Britain, and Sweden. Conover says this occurs in two different ways:

• Deliberate administrative decisions – to deny certain expensive medical technologies and medicines.
• Inevitable shortages – created by a system that imposes price controls that underpay providers.

 

Deliberate Administrative Decisions

In any single-payer healthcare system there is an administrative body empowered to make decisions regarding the availability of healthcare treatment. These bureaucrats, frequently not physicians, concern themselves with the cost of treatment and measure that cost against the likely outcome. They then arbitrarily deny those treatments considered too expensive or too unlikely to produce significant improvement in health, or both.

This administrative body in Great Britain is known as the National Institute for Health and Care Excellence (NICE). Advisory committees to NICE use a threshold for recommending treatments of between L20,000 and L30,000 (British pounds) per quality adjusted life year (QALY). Since 1 British pound currently equals $1.29 (American), that translates to roughly $26,000 to $39,000 per QALY.

To see how this is put into practical usage, consider Medicare currently spends approximately $88,000 per year on kidney dialysis for each patient with end-stage renal disease. Without it these patients will die unless they get a kidney transplant. So Americans evidently are willing to pay $88,000 per year to keep people alive. But this would equal a cost/QALY of $185,000.

In Great Britain this would greatly exceed the NICE cost-effectiveness threshold. If the greater U.S. GDP per capita (34%0 is mixed into the equation, the cost/QALY could rise to as much as $52,000. But this is still far below the true cost of kidney dialysis. Therefore NICE would deny the kidney dialysis treatment – and people would die.

Rationing by Waiting

The second form of rationing, caused by shortages, is rationing by waiting. Insufficient numbers of providers (doctors and hospitals) and diagnostic technologies (CT scanners, MRI scanners, Ultrasound, Radiation, etc.) leads to long waiting times for routine services and surgery, even for non-elective procedures like cancer treatment.

The Fraser Institute of Canada reports, “The median wait time in Canada in 2016 was 20 weeks – the longest ever recorded – and more than double the 9.3 weeks Canadians waited in 1993, when the Fraser Institute began tracking wait times for medically necessary elective treatments.”

This problem is getting worse, not because of significant growth in the population, but because of significant decline in the number of physicians. The evidence coming from studies of the Canadian system shows that physicians deliberately reduce the supply of their services, but working fewer hours, retiring early, or moving to other countries. Thus waiting times are due to a combination of excess demand (see the impact of free care in Part II) and shrinkage of supply.

A study by Wharton Business School professor Patricia Danzon concluded: “In Quebec, in the two years immediately after the introduction of universal health insurance, home visits dropped by 63 percent, telephone consultations fell by 41 percent, physician time spent per office visit declined by 16 percent, and office visits rose by 32 percent.” There is no reason to believe American physicians would react any differently if that system were imposed on our country.

Time spent waiting is not limited to physician services. In Canada, hospitals are paid a fixed budget per year giving the perverse incentive to fill their beds with low cost “bed-blockers” (to prevent more expensive patients from filling those beds). To illustrate the impact of this, consider that Canada has the same supply of beds per capita as the U.S. (2.7/1000 population) but the average length of stay in Canada is 36% higher. The consequence is suffering that is avoidable as patients wait months rather than weeks for various types of surgery.

What is the cost of such rationing if Medicare For All is enacted here?

It is difficult to measure the cost of lives put on hold until proper treatment can be given. Who knows the economic impact, let alone the human cost of such delays?

Danzon concluded that patient time costs under a single-payer health system likely amounted to anywhere from 10 to 110 percent of spending on physician services. Government actuaries project we will spend $717 Billion on physician services in 2017, meaning Medicare For All would impose anywhere from $72 to $789 Billion in hidden costs not included in the Urban Institute estimates of the cost of the Sanders plan.

Conover calculates the grand total hidden cost associated with rationing typical in the Canadian single-payer healthcare approach proposed by Sanders would range from $152 to $914 Billion per year. He considers these to be extremely conservative numbers because they do not attempt to account for the adverse effects on health and longevity from the exclusion of high-priced medicines and treatment likely under a single-payer system.

So far, we have three reasons to oppose single-payer healthcare:

• Deadweight Losses of $1.1Trillion
• Additional Wasteful Spending of $524 Billion
• Additional Rationing Costs of $152 to $914 Billion

 

Altogether, that’s between $1.7 Trillion and $2.5 Trillion in additional hidden costs in the first year alone with single-payer healthcare! (Remember, these costs are not including the obvious costs of just paying for the healthcare!)

For more reasons to oppose this system, tune in next time.

 

In Part I of this series, I discussed the first of five reasons to oppose single-payer healthcare from economist Chris Conover’s point-of-view. Today we will look at his second reason.

The Moral Hazard

Conover says the second reason to oppose single-payer healthcare is the enormous waste it would create due to the moral hazard. This is an economist’s term for the waste created whenever you give someone something for free. Anyone given something for free will consume more of it and will be less likely to shop for a lower price (because it’s already free!). In other words, consumers will use more of the product or service and pay more for it (because someone else is paying the real cost).

This is just as true for healthcare, except when there is an emergency. Since very little of healthcare is actually an emergency, the moral hazard is a very real problem.

Many years ago the RAND Health Insurance Experiment (HIE) proved this point. The HIE randomly assigned thousands of families to different types of health insurance plans ranging from a free care plan (much like Senator Bernie Sanders’ single-payer plan) to a very high deductible plan with a large amount of cost sharing. There was an upper limit on cost sharing so that no family spent more than a certain fraction of family income.

The graphic above shows three different healthcare plans and the results of the RAND HIE. The green band shows wasted spending and the results show there is 30% wasted spending with free care, but much less with the other plans.

That means the Sanders Medicare For All Act can be expected to waste 30% of the money spent. In other words, the value of the healthcare spending under such a system is only 70% of the cost. The annual difference in between the free care group and those with a more sensible cost-sharing design was nearly $2100. Fully 82% of that cost differential represented waste!

How much waste would there be under Medicare For All?

The exact amount cannot be calculated until more details are given about the plan. But according to the Urban Institute, which estimated the Sanders plan would cost $3.277 Trillion per year, we can estimate his single-payer plan would waste over $1 Trillion per year. In addition , it would also include $308 Billion in long-term care services.

To be sure, there is waste in the current system, too. I won’t bore you with the details, but Conover calculates the Sanders plan would cause a net increase in waste of $524 Billion per year.

But wouldn’t free care save lives?

This is the favorite argument of progressives pushing this agenda. Unfortunately, this is wishful thinking. The RAND HIE also compared health outcomes – including risk of death – across all plan participants. Conover says,

“There was not a dime’s worth of difference in health outcomes for the average patient. More scientifically, we can say there was no statistically significant difference in health outcomes (including risk of death) when those who got free care were compared to those with cost-sharing plans, including those in high-deductible plans whose actuarial value was only 54%!”

The only exception was that high-blood pressure and corrected vision problems were worse in those groups with high cost-sharing plans.

So far we have learned that Senator Sanders’ Medicare For All Act will produce:

• $1.1 Trillion in deadweight losses
• $524 Billion in additional wasteful spending

 

That should be more than enough reasons to oppose this plan but we have three more to go! Stay tuned for Part III in this five-part series.